Behavioral Economics: Policy impact and future directions

An extremely important review of Behavioral Economics and its relevance to many different areas. I have marked this report as being highly relevant to my discussions in Sections I (Artificial), II (Meaningful), III (Sustainable) and V (Human Behavior). Why so many? Because that is where this new approach to economics can make a difference. Economists have always completely misunderstood human behavior, and although they often included behavior in their models, the normal assumption is that people were logical, rational, and had access to all the relevant information — all of which are naive, inappropriate and wrong.

As I point out in the book in Chapters 9 (pp. 70-77) and 12 (pp. 103-112), when the first behavioral science approaches were recognized by the Nobel Award committee in awarding a prize to herb Simon, my economist friends called it a wasted prize. But now that there have been numerous Nobel awards to Behavioral Economists, finally, the field is taking it seriously.

The report starts with these words: (from the Summary):

Behavioral economics has had a growing influence on public policy over the past several decades. The awarding of two Nobel Memorial prizes in economics for work in the field is a mark of the influence of this interdisciplinary approach. The field, which encompasses and draws on findings from many disciplines, can be loosely described as an approach to understanding human behavior and decision making that integrates knowledge from psychology and other behavioral fields with economic analysis.

The field took shape as a growing number of economists recognized the work of psychologists who demonstrated that people do not behave as traditional economists had assumed: as rational actors who consistently make decisions that will optimize their expected benefits. These scholars observed, for example, that people do not have complete self-control; make inconsistent choices over time; show selective attention; and respond unconsciously to an array of influences.

People also do not necessarily prioritize, or accurately assess, the benefits and costs of different actions, particularly those that accrue over long time intervals; their decisions are often influenced by the social context in which they are made; they respond unconsciously to the way a choice is framed and presented; and they have limited capacity to overcome logistical obstacles that stand in the way of an objectively optimal choice.

The report focuses upon five behavioral principles that were never before considered in traditional economics, but that followed from years of research in cognitive psychology:

* Limited Attention and Cognition.
* Inaccurate belief
* Present bias
* Reference dependence and framing
* Social preferences and social norms

The report concludes by saying (Conclusion 11-1)

Core principles of behavioral economics have been tested repeatedly across six domains—health, retirement benefits, social safety net benefits, climate change, education, and (to a lesser extent) criminal justice—and the evidence for their importance and value in the design of policy interventions is well established.